The Broadbent Blog

It is time to confront Canada's staple trap

Forbidden to text while driving, you can waste your time checking the fluctuating price of gas at every gas station you see and how at each station it differs from yesterday. All you will learn is that the price shifts up and down over space and time – the operation of that seductive beast called the market – with corresponding effects on your pocketbook or credit card balance.

But if the price of gas is volatile, that’s because the price of a barrel of oil on the global market likewise varies. Large global events – technological (such as the innovation of fracking which yields oil but at higher cost than conventional oil) and geopolitical (such as Saudi Arabia pushing supply and letting prices fall to force out higher-cost production like Canada’s tar sands) – underlie the present downward trend. That then affects not just your disposable income but, if you live in an oil-exporting country like Canada, the state of the national economy.

The moral here is that life in a staple-exporting economy, at least when that staple is oil, is something like riding a roller coaster. If the oil is expensive to extract and ship, like tar sands oil, a low price can put your oil out of business. If, in addition, that oil is especially dirty and has climate and environmental consequences beyond the ordinary (which are bad enough), then importers may be, ought to be, reluctant to touch it.

A country should allow for that price variability and plan accordingly – like not putting all its eggs in that basket. This is precisely what neither the governments of Alberta nor Canada has done or is doing.

Alberta governments have planned so badly that as soon as the price of oil falls – which is bound to happen every so often – their finances move into deficit and austerity has to be imposed. From riches to rags in no time at all. As I write, the federal government is delaying its budget because, says Finance Minister Joe Oliver, the price of oil is “volatile” – as if this is a new discovery.

(He's buying time, praying that oil prices will stop falling and start rising, and when that doesn't happen soon enough, foolishly obsessed with balancing the budget no matter what happens, he will slash government spending, lowering economic growth and increasing unemployment.)

The Harper government and the right-wing think tanks vehemently deny any Dutch disease that hurts manufacturing in Canada when the price of oil and the value of the Canadian dollar are high. And then, they're so shameless as to claim (correctly) that when the price of oil and the Canadian dollar fall – eliminating the Dutch disease to which they never admitted– eastern manufacturing benefits. The mainstream media are then complicit in spreading this impossible message, at best displaying a remarkable unwillingness to engage in straightforward economic analysis.

Yet worse, policy or its absence, or just plain deliberate government mis-messaging, may make the economy more dependent, or appear more dependent, for growth and jobs on one staple than it need be. The fact of the matter is that the major determinant of economic growth is everywhere the diffusion of knowledge. Oil matters to Alberta’s economic growth but matters less – and need not much matter if there was a willingness to consider alternatives – to Canada’s economic growth.

Economic historians, even those (like myself) who are proponents of the staple thesis, know that as well as staple exports, there are always other significant influences on the economy, such as more or less autonomous waves of migration, increasing population, expanding domestic markets, and the growth of cities as centres of creativity.

Over-reliance on staples may create a mentality, a staples trap, that inhibits these liberating forces. Given the dependency and monocultural tendencies of a one-staple economy, it makes sense to try to lessen those effects. Instead, perversely, governments get captured by the staple industry and lock the country in. Our currency becomes a petro-dollar, our state a petro-state.

There’s lots of discussion of the economic effects of staples production – linkages to this and that – and of the regional distribution of benefits and costs, between Alberta and the rest, but an unwillingness to face up to the political consequences.

Part of the problem is that economics frames the whole discussion and economists are unwilling to acknowledge the political – power, in a word – which they choose to imagine is decentralized by the market and is, anyway, always swayed purely by reason for the public good. But oil is power and the more you rely on it, the more it imposes its will, dominating the economy and denying alternatives (Harper’s version of Thatcher’s TINA: “There is No Alternative”).

Economic historians talk of "path dependency," of the difficulty of shifting the way things are done from one path to another. The Canadian economic historian Tom Easterbrook called the Canadian path a pattern of persistence in contrast with the pattern of transformation that characterizes a mature, more independent, developed economy, such as the American. Canada has never achieved that second stage and has no hope of doing so as long as oil is king.

Left to its own devices the staples economy becomes more entrenched; count it another market failure. To get economic development and more balanced and diversified growth there has to be political commitment for change, very much including a change in business culture, to become more entrepreneurial throughout the economy, and a decision among elites, including journalists and academics, to be less devoted to laundering conventional wisdom, and more dedicated to asking disruptive questions.

But I doubt I have said much you don’t already know. The question is: what are you doing about it? The acid test now is our attitude to pipelines. The best grassroots politics to prevent further expansion of the tar sands is to prevent them from being built.

All of this is a compelling economic case against the tar sands and its pipelines without my having appealed to that ultimate game changer and species killer, climate change. Whatever the consequences in the past of staple specialization, there has never been a staple as deadly as oil is today. Not to act on that, to pretend that this is just business as usual, is literally to commit a crime against humanity. Even if all the economic arguments I’ve just made are wrong, climate change would still be the trump card to stop the exploitation of the tar sands.

It’s hardly surprising, but deeply offensive, that there are still some climate change deniers in the oil industry and in the Harper government. One does not get to pick which parts of science one likes and which one doesn’t. For denying there is an elephant in the room does not remove the elephant, and it is one gulping increasingly more of the oxygen, and growing larger by the day.

Mel Watkins is Professor Emeritus of Economics at the University of Toronto. The opinions expressed herein are those of the author and not necessarily those of the Institute.